Financial Trading Compliance in 2021

A Survival Guide

The Compliance Conundrum

Legislation in many regions mandates record-keeping, monitoring and reporting for the banking industry and the capital markets. Those not meeting the requirements risk non-compliance fines, suspended operations, and reputational damage. In order to enable financial compliance, financial services and trading institutions need to keep pace with an ever-changing regulatory landscape to prevent unwanted penalties and severe legal actions by financial regulators.

We have created this guide to walk you through multiple facets of financial services compliance and help you have a better understanding of the following topics:

  • What is financial compliance
  • What does trading compliance cover
  • Which are the most important trading regulations
  • How to enable communication compliance
  • How to reduce compliance costs
  • How to build holistic compliance oversight
  • How to turn data into business intelligence
  • How to prevent compliance risk proactively
Let's Dive InLet's Dive In

Chapter 1.
Understanding Financial Compliance

Financial institutions such as banks, brokerages, asset managers, and security exchanges have been regulated for decades by laws designed to protect consumers and maintain the integrity of financial markets.

For these organizations, managing compliance and mitigating risk are major challenges that are only getting more complex. The extended scope of regulations (such as Dodd-Frank in the US and MAR or MiFID II in the EU) can often result in compliance, audit and IT teams spending countless hours producing data and investigating suspicious activities.

What is financial compliance?

Financial compliance covers the actions, procedures, guidelines and business culture that support the adherence to government legislation, industry regulations, and internal policies. Financial compliance focuses on how the business, workforce, workflows, operations and relationships are managed at a financial services organization.

By nature, financial compliance covers a broad spectrum of areas, such as anti-money laundering (AML), anti-bribery, sanctions compliance, client onboarding and Know Your Customer (KYC), communication compliance, data governance and data privacy compliance, tax compliance, anti-corruption, trading surveillance, and more.

trader mobile calls must be captured to remain compliant

Why is financial compliance important?

Simply put: financial compliance is all about enabling transparency and integrity in the financial markets while protecting customers, investors, the economy and society from financial crime, market manipulation, ethical threats, and systemic risk.

But it’s more than that. In fact, it helps to ensure financial institutions operate responsibly and therefore maintain consumer confidence in the financial system.

Since the financial crisis of 2008, financial regulators have been ramping up their efforts to protect investors, prevent market abuse, and pursue suspicious trading activities while also imposing higher penalties on lawbreakers. The degree of enforcement actions, court cases and settlements have scaled up significantly. Financial organizations and individuals found to be non-compliant face the risk of prosecution, heavy fines, penalties (including imprisonment), and loss of reputation – impacting hard-won customer trust and loyalty.

Regulatory Complexity on the Rise

There is a growing burden on financial services and trading organizations to not only act above-board, but to prove to regulators that they maintain financial compliance. There are a number of trends that increase the complexity of the compliance equation:

  • The weight of regulatory requirements, and their regional variations
  • Expansion of the scope and extent of data to be captured, aggregated, and analyzed
  • Ability to demonstrate that appropriate measures and capabilities are in place
  • Implementation of surveillance systems for transactions and related communications
  • Ability to provide timely responses to regulators’ inquiries
  • Burden of ensuring that complex infrastructure and systems are operating as required
  • Frictionless compliance when using the latest digital communication and collaboration channels, among others.

Chapter 2.
Trading Compliance in the
Capital Markets

Global financial markets continue to become more complex and sophisticated. The way stocks, bonds, securities and other financial instruments are traded today is a far cry from just a few years ago.

Few industries have gone through more change and increased regulation over the past decade than financial trading. Initially, financial trades occurred face-to-face on the floor of market exchanges. Then, over-the-counter trades became popular as advanced computer technology was adopted.

Although trading has become more electronic and algorithm-driven, voice communication still remains an important part of the trading workflow. Traders, investors and other market participants still rely on this channel to negotiate more complex trades and products – such as swaps – and exchange information.

What is trading compliance?

Trading compliance is the process of adhering to rules governing financial trade execution, pre-trade and post-trade activities that involve monitoring transactions and human interactions to detect and act upon anomalies, as well as consolidating, analyzing, and reporting data related to trade events–across trading verticals and asset classes–in order to demonstrate best execution and uncover anomalies.

A crackdown on non-compliance

Since 2009, European and North American banks worldwide have paid over $372 billion in penalties for non-compliance. For most of the past decade, the US led the bulk of enforcement activity, but European regulators have also stepped up their engagement considerably over the past years. Recently, European authorities also began stricter enforcement actions. Among other consequences of these actions were the resignations of several high-level bank executives.

[Image Source: Boston Consulting Group]

Regulators increasingly crack down on money laundering, financial crime, insider trading, transaction reporting failures, and other compliance failings.

These anomalies drove fines issued by the UK’s Financial Conduct Authority (FCA) to their highest level in 2019 compared to the previous four years – totaling over £392 million with nine £10m-plus penalties levied only in 2019. During the same period, a record number of anti-money laundering (AML) fines were imposed globally by financial regulatory bodies: $8.14bn were handed down for a total of 58 AML-related breaches globally. The US and UK financial regulators led the way in anti-money laundering (AML) penalties issued during the course of the year, collectively accounting for more than 30% of the fines globally.

View our infographic for stats and figures from the world of financial compliance.

Chapter 3.
Trading Regulations

Financial regulators have passed a set of new regulations to address recordkeeping, surveillance, and reporting of trading activities for stronger control and transparency.

Strict regulatory regimes governing across global banking and the capital markets–such as the Dodd-Frank Act, SEA 17a-4, MAR, and MiFID II– mandate stricter rules for call recording, trade and communication surveillance, and transaction reporting for banks, investment managers, broker-dealers, hedge funds and other financial institutions globally.

With the pace of new regulations, many organizations struggle to navigate the regulatory landscape and lack the technology to proactively monitor their operations, produce relevant data and respond to regulators’ requests in a timely manner.

Financial compliance under MiFID II

Building on the foundations of the first Markets in Financial Instruments Directive, MiFID II aims to create a regulated, transparent, and accountable financial environment within EU investment services. This means increased supervision and a new set of obligations for recordkeeping, monitoring and reporting for investment firms.

MiFID II is a revised directive, which came into force on 3 January 2018 across all the European Union’s member states and beyond. The new requirements aim to create a regulated, transparent, and accountable financial atmosphere within the EU.

MiFID II applies to financial services businesses operating anywhere in the EU. Many non-EU-based institutions that trade with European clients and entities must also comply. The legislation has broadened record-keeping and monitoring requirements and provides a stricter legislative framework for financial trading activities:

  • Financial services firms must record all voice and electronic communications – including voice, email, IM, and video – that relate to actual or intended transactions.
  • Data must be stored for at least five years (seven years in certain cases). Additionally, it should be retained in a durable medium that can be easily accessed by regulatory authorities.
  • Investment firms must have appropriate monitoring procedures in place for systematic surveillance of transactions, communications and the recording procedures
  • Companies found non-compliant with MiFID II will risk fines of up to €5 million, or 10% of global revenue.
Recommended reading:
7 Ways to Comply with MiFID II7 Ways to Comply with MiFID II

The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010 as a response to the financial crisis. It aims to improve accountability, transparency and consumer protection in the US financial sector.

Dodd-Frank affects all federal financial regulatory agencies and many other aspects of the US financial services industry. New rules have been implemented related to record-keeping and risk management. Failure to comply can mean heavy fines and penalties.

The Dodd-Frank Act doesn’t just apply to US-based financial businesses. Many non-US-based institutions that trade with US entities must also comply. Similarly, MiFID II expects financial services organizations outside the EU to comply with its provisions when doing business with European institutions. The Dodd-Frank Act also requires firms to implement monitoring programs that can ensure traders are not using or communicating practices and news that are deemed to be manipulative:

  • Storage of daily trading records of all trade activities, including voice, email, IM, chat, mobile, and other electronic communications, for a period of 5 years, in a secure archive.
  • Compliance departments upon request must be able to retrieve requested data and provide records to the regulator within 72 hours.
  • Implementation of surveillance procedures that keep watch for market manipulation and insider trading.

Regulatory diversity in the Asia Pacific region

The complex regulatory landscape in the APAC region has increased the need for effective compliance programs and improved oversight over operations, transactions and employee conduct for financial services and trading organizations. Companies are facing mounting pressure resulting from the constantly evolving regulatory complexities and requirements in APAC.

Recent regulatory initiatives in APAC jurisdictions such as Singapore, Hong Kong and Australia are driving financial firms to look at technology solutions to improve automation and efficiency in compliance monitoring and compliance management. Asia Pacific regulators are increasingly watching if financial services firms are consistently verifying customer accounts (KYC), driving transparent anti-money laundering programs and demonstrating compliance as a continuing regulatory priority.

Learn about the latest trends in the realm of financial risk and compliance in Asia Pacific and beyond.

Across the region, robust procedures for data capture, trade surveillance, and timely identification and action on suspicious matters have been and continue to be top of mind for regulators. Yet, there has been a significant increase in regulatory reporting and record-keeping requirements in APAC, especially since the 2008 financial crisis.

Concentrating on good governance and other preventative mechanisms to supplement reactive enforcement and mitigate the risk of misconduct is an increasingly important part of the Asia Pacific regulatory agenda.

Learn more about Trading RegulationsLearn more about Trading Regulations

Chapter 4.
Challenges on the Financial Compliance Landscape

For financial organizations, managing compliance risk is a major challenge that is only getting more complex to address. With hundreds or even thousands of traders and millions of transactions, that’s not easy to do.

How to meet complex regulations and maintain compliance?

Financial services and trading regulations have been long governing banks, brokerages, security exchanges, and other players of the capital markets. But more stringent legislation around the world – to address insider trading, market abuse, money laundering, data breaches, and management accountability – has tightened the rules and increased their scope.

In addition, managing the avalanche of increasingly complex and constantly evolving financial services regulations can be a daunting task – especially for banks and investment firms who operate globally. Keeping on top of it all is tough, but it can be done.

How to make communications compliant?

In a financial trading environment, the most common and basic requirement is capturing trade-related interactions to have a record of what was said in the conversation related to the execution of a trade, including those executed via turret systems, mobile phones, and UC platforms such as Microsoft Teams, Cisco UC or Skype for Business.

In addition, the number of communication channels that are potentially involved in trade activity has increased dramatically, expanding from voice interactions to include chat, video, text messaging, screen activities, and other forms of electronic communications. Auditors, surveillance teams and compliance officers can spend countless hours manually listening to calls and investigating suspicious activity.

How to reduce compliance costs?

The cost of regulatory compliance has risen dramatically in recent years. Most of the expenses are driven by the increased number of staff needed for supervision, testing, monitoring, and other oversight responsibilities. But there is growing realization that continuing to throw additional resources at the compliance conundrum – and focusing solely on reactive measures once a compliance event occurs – is not a sustainable strategy.

While compliance spending will continue to increase, transforming compliance solutions is of growing interest to financial services organizations.

How to build holistic compliance oversight?

Disconnected processes, systems, and policies combined with a lack of operational and compliance oversight put an extra burden on organizations. As an organization evolves, the risk of siloed operation also rises.

Each department uses its own system and communications infrastructure, which – without proper oversight and supervision – can make financial compliance efforts even more challenging. Keeping on top of it all puts significant weight on IT, operations and compliance teams.

How to turn data into business intelligence?

With large volumes of interactions taking place between traders and counterparties on voice and electronic channels, organizations need the ability to make sense of that data to reconstruct individual trade activity. With more data than ever, how can you make it available for regulators quickly?

Under recent regulations, organizations need to cover all their bases across communication channels and have the ability to gather significant quantities of unstructured data from voice, text, and other recorded interactions. Having gathered that data, they need intelligence powered by AI, machine learning, automation, and other emereging technologies to find and correlate suspicious communications and actions.

How to prevent compliance risk proactively?

Many financial institutions are subject to complex regulations that impact their communications environment. However, taking corrective measures once a failure occurs means businesses are only reacting to compliance issues after-the-fact once they have already escalated into legal actions, hefty fines, and increased scrutiny by the regulators.

By proactively verifying adherence to policies and controlling information exchange, financial institutions and trading firms can manage conduct risk, avoid unwanted disclosures or conflicts of interest, and get an instant view of faulty operations in advance.

Reinventing Financial Compliance for the New Market Landscape

Discover why businesses need to take a unified approach to financial trading compliance through a blend of reactive, active and proactive compliance capabilities to succeed in today’s regulatory environment.

Start Your Compliance JourneyStart Your Compliance Journey